Could US Q3 GDP Surprise to the Upside?
RedStone Resource
October 19, 2022
Inside This Edition
US Dollar Continues to Build Strength
The US dollar index is at its highest levels since 2002. A combination of the US Federal Reserve hiking interest rates and global flight to safety has pushed the dollar higher. The impacts can be significant.
Producer Prices Show Transportation Prices Remain High, But Continue Deceleration
The Producer Price Index for the three primary modes of transportation showed a similar trend through the end of September, sequentially prices continue to soften but they remain significantly higher on a year-over-year basis.
Diesel Prices Remain Elevated, Inventories Remain Tight
US diesel retail prices remain elevated, currently they are 45.7% higher than they were at this time last year and 71% higher than they were prior to the pandemic. But the bigger story could be refinery production and current inventory levels, both of which are concerning.
ECONOMIC BRIEFING
Could US Q3 GDP Surprise to the Upside?
Most forecasts for US third quarter GDP predicted that the US economy would come in barely above zero, the Federal Reserve predicted it would grow at just 0.3%. But there is a datapoint that is released by the Atlanta Federal Reserve that tracks GDP throughout the quarter and it is currently showing the “NowCast” estimate for Q3 at 2.8%. That would be a shock to most forecasts. Even the Blue-Chip Forecast (which is made up of dozens of economists’ forecasts) was only expecting 1.2% growth for the quarter.
There are still many economic data releases for September and October that could influence the final figures for Q3 GDP, but this is an encouraging outlook. Job creating is still steady at roughly 200K jobs per month, the quit rate is still high, unemployment remains low, and wages are growing at roughly 5%. Many households are still under-water with inflation running 8.2%, real wages (after inflation adjustments) are declining by three-tenths of a percent. So, just like the outlook for Q3 GDP, data trends are coming in mixed and confused.
Many companies will be watching their inventory levels closely and if they begin to see consumer spending exceed expectations (which a faster growing economy could create), a new wave of manufacturing new order demand could help create a soft landing for the broader US economy in 2023.
US Dollar Continues to Build Strength
The US dollar index is at its highest levels since 2002. A combination of the US Federal Reserve hiking interest rates and global flight to safety has pushed the dollar higher. The impacts can be significant. It does boost import activity because essentially everything around the world is effectively on sale. The dollar strength buys so much more from global trading partners. That tends to encourage stockpiling and inflating inventories (especially for products that are not subject to spoilage, obsolescence, or extreme trendiness). It also has a dampening effect on oil prices, which thankfully at this time is likely pushing prices lower than they should be.
On the other hand, it does make it difficult to sell US exports, especially in a global environment in which inflationary pressures are already pushing some product prices higher prior to exchange rate impacts.
The third affect that it has is that it makes it more expensive to pay back debt in dollars. For some emerging markets (many critical to global trade), it pushes their debt burden much higher and can increase sovereign debt default risk. The current global financial situation makes it difficult for many countries to prop up their currencies sufficiently enough to make a difference, and that creates more global financial risk. It can become a difficult cycle to break.
TRANSPORTATION BRIEFING
Producer Prices Show Transportation Prices Remain High, But Continue Deceleration
The Producer Price Index for the three primary modes of transportation showed a similar trend through the end of September, sequentially prices continue to soften but they remain significantly higher on a year-over-year basis.
Truckload prices decelerated in September, slipping by 0.8% M/M. But they remained 12.0% higher on a year-over-year basis, which is also remarkable knowing that they are also now starting to go up against tougher year-over-year comparisons. They were still 39% higher than prices prior to the pandemic.
Less-than-truckload prices are 0.3% higher M/M and were 16.0% higher Y/Y. They were 39% higher than pre-pandemic levels.
Rail freight prices were also 0.4% higher M/M and were 10.7% higher year-over-year. They remained 17.4% higher versus the pre-pandemic levels.
Diesel Prices Remain Elevated, Inventories Remain Tight
US diesel retail prices remain elevated, currently they are 45.7% higher than they were at this time last year and 71% higher than they were prior to the pandemic. But the bigger story could be refinery production and current inventory levels, both of which are concerning.
East coast refinery output is running at just 76% of the 5-year average. Refineries are running at near capacity, but overall refinery capacity has been reduced in the region and consumption has continued to increase annually. Without cheaper distribution systems for refined fuels hitting the east coast, it has pushed prices higher. Imports of diesel onto the east coast are down 40% due largely to the War in Ukraine and cuts in Russian fuel imports. And yet, diesel prices are highest in California at nearly $6.49 a gallon in the state.
The EIA is projecting that more countries are “fuel switching” to reduce their reliance on natural gas. Reportedly, Europe is switching to more distillate fuel electricity production to reduce their reliance on natural gas, which is tightening the global supply of distillate fuels.
With this backdrop, diesel prices will remain higher for the rest of the year and into 2023, even if transportation demand for diesel softens some.
